by Thomas F. Scanlon, CPA, CFP®
Here are 5 Easy Steps to do this:
1) Determine who you will be Required to File a 1099 For
Form 1099 is due to any independent contractor who is unincorporated and you pay $600 or more to in a year. Additionally all payments for legal services must be issued a 1099 regardless of whether the provider is incorporated or not. An unincorporated business includes sole proprietorships, general partnerships and limited liability companies (LLC).
2) Dont Miscateragorize an Employee as an Independent Contractor
The IRS has a Twenty Factor Test for helping employers determine if someone is an independent contractor or an employee. Generally, a business would prefer to categorize workers as independent contractors. When they do this, they dont have to pay any social security taxes and unemployment taxes. Additionally, if someone is classified as an independent contractor the employer does not have to cover them with workers compensation.
Employers need to have a clear understanding of this Twenty Factor Test as this is a hot issue with the IRS.
3) Have all of Your Contractors Complete Form W-9
This form will have the contractor attest to their correct name, address and tax identification number. Additionally they will attest as to whether they are subject to back-up withholding or not. This should be obtained prior to them starting work.
4) Secure all of the Other Necessary Paperwork
In addition to having a signed Form W-9 before a contractor starts working a signed contract should be in place. Its also prudent to get a copy of the contractors insurance policy for your file.
5) Issue Form 1099
The most common form that is issued is Form 1099-MISC. The most common box used on this form is Box 7 for nonemployee compensation. Another common category on this form is for rent. Many landlords hold their real estate in an LLC and therefore a 1099 would be required. 1099’s that are paper filed (not electronically) only need to have the last 4 digits of the social security number or taxpayer identification number listed to help reduce the risk of identity fraud.
The Form 1099 is due to the recipient by January 31. The copy to the IRS is due by February 28. The sum of the 1099’s are accumulated and transmitted on IRS Form 1096. Failure to file the Form 1099 may result in penalty. The penalty can go up to $100 per return not filed. Business issuing a large volume of 1099’s must file them electronically. States may have their own reporting requirements for 1099’s.
Will you use these 5 easy steps to file your 1099’s?
Thomas F. Scanlon, CPA, CFP® is with Borgida & Company, P.C., Certified Public Accountants in Manchester, Connecticut, celebrating 44 years of tax, advisory and accounting services. Please call (860) 646-2465 or email [email protected] if you would like more information.
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